Dartmouth board members are accused of enriching own firms

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Criticizing: Joshua Humphreys claimed Dartmouth has ‘a crisis of stewardship.'

New Hampshire's attorney general is looking into claims of conflicts of interest against members of the board of trustees and the investment committee of Dartmouth College in regard to their management of the college's $3.4 billion endowment.

Anthony Blenkinsop, the Concord-based director of charitable trusts for the state of New Hampshire, said he is in the process of reviewing a letter sent to New Hampshire Gov. John Lynch and Attorney General Michael Delaney. The letter calls for an investigation into money managers who have invested the Hanover, N.H.-based college's assets while members of the investment committee.

Mr. Blenkinsop, who is a member of the attorney general's staff, said the office will determine whether to conduct an investigation after the initial review.

A group of Dartmouth faculty members, university employees and alumni — none of whom has come forward publicly — sent the letter earlier this year, but its contents only recently became public when it was posted on an unofficial university blog. The letter accuses the money managers of “enriching themselves” through private equity, venture capital and hedge fund investments made by the endowment.

“We call on the governor and the attorney general to launch an investigation and to request that these trustees resign because of their mismanagement and conflicts of interest and that Dartmouth divest itself of investments in trustee-managed funds,“ the letter reads.

It also accuses the college of squandering university assets, citing major hedge fund losses and the investment of $550 million in interest-rate swaps with now-defunct Lehman Brothers that it says are now worth $250 million.

Justin Anderson, a spokesman for Dartmouth, said the information in the letter is wrong. He did say the university had a cumulative unrealized loss, or “negative value” from the swaps of $89.4 million, as of June 30, 2011. He did not discuss the hedge fund claim, nor would he discuss fees paid to the managers.

Performance data in recent years from the endowment's annual reports show that Dartmouth's marketable alternative equity portfolio trailed the HFRI Fund Weighted Composite index in 2009, posting a return of -15.2% vs. -10.05% for the index. However, the college's hedge fund portfolio significantly outperformed the index in 2010 and 2011 — by 588 and 461 basis points, respectively. Dartmouth's hedge fund portfolio returned 15% in 2010 vs. 9.12% for the index, and 16.1% in 2011 vs. 11.49% for the index.

Managers and trustees

Money managers who are university trustees and whose firms also manage endowment assets are Bill Helman, chairman of the investment committee and a partner in venture capital firm Greylock Partners; Stephen Mandel, chairman of the board of trustees and founder of hedge fund Lone Pine Capital LLC; Bradford Evans, an investment committee member and university trustee who is a vice chairman of Morgan Stanley (MS); and James Coulter, founding partner of private equity firm TPG Capital. Also, the spouse of board member Denise Dupre is Mark Nunnelly, managing director of private equity firm Bain Capital, with which the endowment also has an investment.

The letter also details endowment investments in funds run by Apollo Global Management, whose founder, Leon Black, is a former college trustee; Technology Crossover Ventures, whose founding general partner, Richard Kimball, is a non-trustee who serves on the investment committee; and TA Associates, whose partner Andrew McLane also is a non-trustee investment committee member.

Dartmouth board rules allow non-trustees to serve on the investment committee. Mr. Kimball is scheduled to join the Dartmouth board on June 12.

According to the letter, Dartmouth has invested more than $48 million of its endowment in Mr. Helman's funds and paid his firm an estimated $7 million in fees; invested $148 million in Mr. Mandel's funds and paid his company around $24 million in fees; and invested $60 million in three Morgan Stanley real estate funds.

The college has investments with firms affiliated with seven of the 34 combined members of the investment committee and board of trustees.

Mr. Blenkinsop of the attorney general's office said that under New Hampshire law members of charitable boards, such as those that regulate endowments like Dartmouth's, are permitted to engage in transactions with their organizations, as long as they recuse themselves from the vote and the organization's board approves the transaction by a two-thirds vote. In addition, he said the transaction must be disclosed to his unit and published in a local newspaper.

According to Mr. Anderson, Dartmouth invested $90 million in three Morgan Stanley real estate funds between March 2005 and March 2007. The college also invested $40 million in Lone Pine funds between March 2009 and April 2011, and $30 million in Greylock funds or funds in which Greylock had an ownership interest, between November 2009 and February 2011.

Mr. Anderson also disclosed an investment of $15 million made in Bain Capital's Asia Fund II in December 2011.

Mr. Anderson said all the initial investments in various funds were made before the investment professionals joined the investment committee. He would only detail investments made after the trustees joined the board and would not discuss how much was invested in funds from Technology Crossover Ventures or TPG, saying Messrs. Kimball and Coulter were not on the board of trustees when the investments were made.

Above and beyond

Robert Donin, the college's general counsel, said Dartmouth not only followed state law, but went beyond it in making further commitments to the funds. He said college rules that went into effect in 2008 require a full due-diligence review before money can be invested in a fund affiliated with a trustee's or investment committee member's company. The review includes an analysis of competitors' offerings so the university can be assured it is making the right decision, he said.

While the letter focuses on Dartmouth, it puts the spotlight on the dual role that some college trustees, who work in the investment management industry, play.

In a report on endowment investing by the Tellus Institute, Boston, that was released in 2010, Dartmouth stood out for its high number of trustees and investment committee members involved in running money for the university, said Joshua Humphreys, a fellow at the institute and author of the report.

“We call it a crisis of stewardship,” Mr. Humphreys said. “When you have so many people sitting on the investment committee who are making money from the university, how can you have independent stewardship?”

John Griswold, executive director of the Commonfund Institute, Wilton, Conn., said the higher education group tried to track college and university policies on trustees doing business with their colleges on yearly governance surveys, but dropped the question several years ago because only around 15% of institutions responded.

He said a trend toward increased transparency and accountability over the past few years has resulted in higher education institutions tightening up conflict-of-interest policies on doing business with trustees' firms. “There is a lot more chatter going on, and colleges and universities are sensitive about it,” he said.

While it could not be learned how much of the endowment's total assets are currently run by firms linked to trustees or investment committee members, Todd Zywicki, a law professor at the George Mason University School of Law in Fairfax, Va., who served as a Dartmouth trustee from 2005 to 2009, said he pushed for that information while on the board. “The number came to 15% of the endowment,” he said. “I was stunned.”

Data Editor Timothy Pollard contributed to this story.